| Photo: “Brazilian National Congress” by * Luis Felipe Luz * is licensed under CC BY 2.0.
The core of the proposed tax reform centers around the implementation of a “dual” value-added tax (VAT), which will be applied at the destination rather than the current origin basis of taxation. This shift is a significant improvement, as it aligns the tax system with international best practices and reduces the administrative burden on businesses.
KEY BENEFITS OF THE DUAL VAT SYSTEM
One of the primary advantages of the dual VAT system is that it allows businesses to deduct taxes on their inputs. This change effectively eliminates the issue of tax cascading, where taxes are levied multiple times throughout the production process, leading to increased costs and inefficiencies. By allowing tax deductions on inputs, the reform simplifies the tax structure and reduces the overall tax burden on businesses, potentially leading to lower prices for consumers.
COMPENSATION MECHANISMS FOR STATES
To address potential concerns from states regarding revenue losses due to the shift in the tax base, the reform includes the introduction of various funds and compensation mechanisms. These measures are designed to offset any negative financial impacts on state budgets, ensuring a smooth transition to the new tax system without disrupting public services.
THE COMPROMISE OF THE DUAL VAT MODEL
The initial proposal for a single VAT met with resistance from states and municipalities, which feared it would erode their tax autonomy and centralize power at the national level. In response to these concerns, the dual VAT system was proposed as a compromise. This approach preserves the principles of federalism by maintaining separate national and subnational tax components, allowing states and municipalities to retain a degree of control over their tax revenues.
CONSOLIDATION OF EXISTING TAXES
Under the dual VAT system, five existing federal, state, and municipal indirect taxes will be consolidated into two distinct VAT components: a national VAT and a subnational VAT. This consolidation simplifies the tax structure, reduces the administrative complexity associated with multiple tax regimes, and makes compliance easier for businesses operating across different jurisdictions.
DRAFT VAT LAW IS AVAILABLE TO DOWNLOAD HERE:
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BR Draft Reform Law – Word (Portuguese)
This file contains the draft for the reform law in Portuguese, discussing various legislative updates related to taxation. File size: 37 KB -
BR Indirect Tax Draft Law – Word (English)
An unofficial English translation of the Brazilian indirect tax draft law, outlining the establishment of Goods and Services Tax (IBS) and Social Contribution on Goods and Services (CBS) for English-speaking users. File size: 47 KB -
BR Draft Reform Law – PDF (Portuguese)
This PDF document provides an official version of the Brazilian draft reform law in Portuguese. File size: 262 KB
